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Further reforms will promote a stronger and more inclusive Hungarian economy

31/01/2019 - The Hungarian economy is in the midst of a strong recovery, driven by high levels of employment that are boosting wages, consumer confidence and domestic demand. Policy should aim to prolong the economic expansion, ensure that growth is greener and that the benefits are shared amongst all Hungarians, according to a new report from the OECD.

The latest OECD Economic Survey of Hungary looks at the factors behind the current expansion, as well as policies to help overcome the principle domestic and external challenges to the outlook. The Survey projects growth of 3.9% this year and 3.3% in 2020, and lays out an agenda for making the economy stronger, sustainable and more inclusive.

The Survey, presented in Budapest by Alvaro Pereira, Director of Country Studies in the OECD Economics Department, and Hungary’s State Secretary for Financial Affairs Gábor Gion, highlights the importance of policies to promote skills acquisition, mobility and stronger regional growth. It also underlines the need to address population ageing, to limit pressure on public finances, notably as concerns pension and health spending.

“The Hungarian economy is growing at a rapid pace, with unprecedented levels of employment, unemployment at historic lows and strong wage growth all contributing to a demand-led expansion,” Mr Pereira said. “This excellent performance is not without risks, notably as concerns growing inequality between Hungary’s regions. Ensuring long-term sustainability will require policies to create economic opportunities for all.”

The western and central parts of Hungary, which are the main recipients of foreign investment, and Budapest, which benefits from being a large agglomeration, have grown faster than the rest of the country, which suffers from low levels of employment, high levels of social transfer recipients and poor integration into regional and national supply chains.

To counter this unbalanced growth, the Survey suggests the central government afford local authorities greater autonomy to execute projects that benefit the local economy. Better vocational education and training is needed, with courses and curriculum adjusted to the needs of the local labour market.

To address the pressure on public finances from population ageing, the Survey proposes Hungary raise the statutory retirement age to 65 by 2022, then link further changes to gains in life expectancy. It also suggests removing all possibilities for early retirement while introducing a basic state pension to guarantee a minimum income for all pensioners.

To reduce public spending pressures from health care, the Survey points out the need to improve efficiency across the health system. This could include reducing hospital stays through enhanced out-patient care, concentrating in-patient care in fewer, but better-equipped and more specialised hospitals, and integrating the various long-term care systems.

To make growth greener and improve environmental outcomes, the Survey suggests that road tolls and taxes take better account of vehicle environmental performance. Congestion charges combined with better public transport can be used to improve urban air quality. Fiscal incentives can be used to encourage replacement of inefficient and high-emission heating systems, the Survey said.